What’s The Best Way To Finance A New Solar System?
By Finn Peacock – Charted Electrical Engineer, Ex-CSIRO, Founder of SolarQuotes
Last Updated: 15th Oct 2024
Let’s be honest. Although solar power can provide you with the security of low electricity bills for decades, it has one big challenge:
Finance – how do you find the cash to buy it?
A decent-sized (10 kW), good quality home solar power system can cost north of $8,000. That’s a big chunk of change to find.
A solution – of course – is to buy a solar system on credit, or finance.
Although we all like the thought of tiny power bills, we are also very wary of getting into debt; and so we should be. Debt incurs interest, which adds to our living expenses. I personally try to avoid it wherever possible.
But solar finance is different. If it is used thoughtfully, a well financed, properly sized solar system can save you more money every month than it costs you to finance. Yes – even including interest.
However, you need to shop around, not just for the solar panel system, but for the best finance. The difference between solar saving you money each month and costing you will mostly come down to the deal you can get.
A word of caution on “No Interest” Buy Now, Pay Later
If you see a finance deal claiming ‘no interest’, the devil is in the details.
Some state governments—such as Victoria—offer genuine, taxpayer-subsidised, no-interest finance for part of the purchase price. For example, in VIC, the interest-free solar loan is only $1,400.
Otherwise, the solar installer has partnered with a “Buy Now Pay Later” (BNPL) company to finance the whole deal.
Don’t be fooled by the “0%” spruiked by BNPL companies into thinking you are getting cheap finance! They simply add a 15-25% merchant fee – absorbed into the total price you pay – to cover the finance costs.
For an $8,000 system purchased with 0% finance, the solar provider might only receive $6,000.
Invariably, you pay the merchant fee through inferior quality componentry or a higher retail price than a comparable self-funded system. Learn more about the tricks and traps of BNPL solar here.
Interest free loans have long been a way merchants can take advantage of the mental shortcuts we all take when making decisions, especially about technology or brands we know little about. It can sound too good not to take up, but before you do we recommend you do the research first and compare your finance options.
Here are six common ways to finance a solar power system:
1. Green Personal Loans
Green personal loans are offered by financial institutions for purchasing solar, EV chargers, batteries and home energy efficiency measures such as insulation and heat pump hot water systems. Because they can take your individual circumstances into account and because they’re for purchases that will save you money, they can have lower rates than typical personal loans. The best I’ve seen recently have a comparison rate of around 6.5%. But be careful! Some have the gall to charge over 20%.
These loans are generally for 1 to 10 years. Usually, they have an application fee and it can be steep. Watch out for establishment fees, monthly fees and early repayment fees that can significantly add to the total cost of your system.
If you’re unable to pay with cash or refinance your current home loan, then a green personal loan may be your best option – so long as you find one that offers a better rate than a standard personal loan.
Who are green personal loans best for? Most people who don’t have bad credit and can’t get a lower rate through a mortgage refinance.
Tip: For zero out of pocket monthly expenses, speak to your finance provider about balancing estimated solar savings with a loan term to match the repayments.
2. Cash
“Cash is not finance!”, I hear you say. But in order to compare the different financing options, you must compare them to the old fashioned way of buying things – with cash.
If you are debt-free and have cash looking for a place to go, then investing in a solar power system will give many other investments a run for their money. Most solar systems currently generate a tax-free return that is higher than current bank interest rates or government bonds.
If you use most of your electricity during the day, a 6.6kW system purchased for $6,500 will generally pay for itself in around five years. That’s a return of 12% per annum. If you’re not home during the day then the returns won’t be as spectacular, but likely still above bank interest rates.
Who should consider paying cash? Anyone who has the savings and in particular cashed-up, debt-free retirees who want a higher return on their nest egg without taking undue risk.
Tip: When comparing solar power with other investments, remember you can’t tax electricity bill savings.
3. Add to your home mortgage
The lowest retail mortgage rates average around 6% as of October 2024. Considering the 12% return from home solar panels in the example above, you could be better off borrowing more against your home to invest in a solar system rather than reducing your mortgage.
Those fortunate enough to have money sitting in a home loan offset or redraw account will effectively pay the same interest rate as for their home loan if they draw on it to pay for solar.
If you don’t have money set aside in that way, funds can often be obtained by refinancing your mortgage. This is also known as a top up loan. It will increase your loan payments but the savings from solar mean you can come out well ahead.
If you refinance your mortgage you’ll generally continue to pay your home loan’s normal interest rate. But you may be able to get an even better rate with a mortgage refinance green loan. The only one I know of is from the Commonwealth Bank and is available to those who have a home loan with them. Its current interest rate is 3.99% and considerably better than home loan rates. Other financial institutions may soon offer something similar.
Before you decide, you should compare the total cost of a home loan versus a short term solar loan. Be careful of big application or variation fees and any effect it may have on lender’s mortgage insurance.
Who is this best for? Homeowners without enough cash on hand to pay for a solar system. It’s especially useful to those able to get a mortgage refinance green loan with a lower interest rate than their home loan.
Tip: Commit to paying more than the minimum repayment amount with your solar energy savings and see your home loan pay down faster.
4. Rent to own/solar leasing
With this option, the leasing company owns the system until you fully pay for it over the term of the ‘lease’. Unlike leasing a car, the solar power system can not be easily removed from your house and leased to someone else.
If you decide to sell your house you will need to pay the outstanding balance of the loan because the contract cannot be transferred to the new property owner.
The solar leasing salesperson will tout “just pay a simple monthly fee, which is often less than your current electricity bill.” In theory you come out ahead, but beware of the actual interest rate that is baked into the monthly lease.
Compare the cash price of the system you are buying to the total amount you will pay over the term of the lease. The difference is in effect the interest you pay to enjoy the benefits of solar energy now while paying later. Don’t be fooled by the low monthly payments that are in theory covered by the energy savings from solar panels.
Who is rent to own/solar leasing best for? We only recommend this type of financing for larger solar systems, typically put on commercial premises.
Tip: Always compare the total cost of every finance option you are considering. Repayments for a long term solar loan may well be as low as the lease payments.
5. Power Purchase Agreements (PPAs)
The idea is you get the system installed for no upfront cost, then pay the solar company for the electricity a system generates. For example, they could charge you 20c per kilowatt-hour of solar electricity generated compared to the 30c you typically pay for grid electricity.
Sounds like a no-brainer, right? Unfortunately, there is one flaw. Under a PPA, you are contractually obligated to buy a set minimum amount of electricity from the retailer, regardless of whether or not you actually need it in your home. This means you could potentially be paying for energy that you don’t need.
Solar PPA’s are popular for commercial properties and factories that use loads of electricity during the day, which means almost all the solar electricity is used on-site. But unless you own a factory, PPAs are probably not a good solution.
Who is PPA best for? We only recommend this type of financing for larger solar power systems, typically installed at commercial premises.
Tip: If you run a home business that uses a considerable amount of electricity during the day, then a PPA may be suitable for you. Just be sure to check your electricity consumption patterns to be certain you will come out ahead.
6. Personal Loan
A finance company can help those who can’t borrow more on their home mortgage, or want the added incentive of a higher interest rate to ensure they repay the loan faster. If you don’t have the discipline to repay more than your minimum repayments, then a personal loan may work out as a cheaper option in spite of the higher interest rates.
Similar to green loans, some lenders will factor the loan purpose, your home ownership status and other aspects, and may offer better than market interest rates.
A finance company will pre-approve your loan, allowing you to negotiate as a cash buyer and ensuring you can get the best system for your money. If you decide to sell your property, then the loan is unaffected as it is guaranteed by you personally and not tied to your house.
Who is a personal loan best for? Those with good credit who want the flexibility to fund items other than solar, a competitive interest rate, and the negotiating power of a cash buyer.
Tip: Your bank typically won’t offer a competitive interest rate because their pricing is one-size-fits-all. This means you could be paying the same rate as the 19 year old student borrowing the cash to go backpacking around South America. An exception: at time of writing the Commonwealth Bank offers a special rate to mortgage holders if borrowing to buy solar/batteries.
My service can connect you with good solar installers able to assist with various forms of finance. You’ll get expert advice on a system right for your circumstances and a quality installation; backed by the SolarQuotes Good Installer Guarantee.
When you request quotes from my service, we’ll also ask you whether you’re interested in a green loan or other finance for your system. If so, you’ll be able to select up to three trusted finance providers to present you with options tailored to your circumstances, obligation-free.
About Finn Peacock
I’m a Chartered Electrical Engineer, solar and energy efficiency nut, electric car and e-bike owner, dad, and founder of SolarQuotes.com.au. My last “real job” was working for the CSIRO in their renewable energy division. Since 2009 more than 750,000 Australians have used my site to get quotes for high quality PV systems from pre-vetted solar installers.